EDITORIAL - Global bonds might help close the gap

Peter Phillips has our sympathies as he struggles between that proverbial rock and a hard place in the face of the public's snarling over his proposed tax on withdrawals from deposit-taking institutions.

For while the finance minister has signalled a willingness to reconsider the provision, he has rightly made clear that any replacement must be from sources that are predictable and fully capable of delivering the J$2.25-billion measure expected from the withdrawal levy so as to balance the Budget and, more critically, meet the target of a primary surplus of 7.5 per cent of gross domestic product. And that, in our view, is non-negotiable.

In the event that there are not those assurances, Dr Phillips' only option is cut the Budget by the foregone $2.25 billion, or 0.4 per cent of the project spending, rather than risk the economic programme and Jamaica's agreement with the International Monetary Fund. For the country has come too far to falter now.

It is against that background that we place on the table for possible consideration one option which, while it may not completely close the gap, may go the distance towards doing so without the need to introduce a 'new' tax. Rather, subject to legal opinion, it would, on the face of it, be closing a loophole by having financial houses that retail global bonds in the domestic market collect, and remit to the Government, withholding taxes on them.

global bonds

Indeed, it is estimated that Jamaican financial institutions hold between 50 and 90 per cent of the global bonds issued by the Jamaican Government, a portion of which they package and retail, very much in the way that is done with other repurchase agreements. More than US$3 billion of these bonds are on the market, with redemption stretching to 2039. A €150-million bond, with a coupon of 10.5 per cent, is to be redeemed in October.

With 'domestic' instruments, financial institutions withhold the 25 per cent tax levied on interest income. But the tax issue is murky, with global bonds retailed locally. People, apparently, are expected to file such interest earnings as part of their annual income statements. It is assumed that there is significant leakage.

It is likely that this suggestion will meet opposition, but it is important to keep in mind why the reforms and meeting the fiscal targets are important. For 40 years, average annual economic growth was below one per cent, and we accumulated a debt that was approximately one and a half times the value of a year's worth of all the goods and services produced in Jamaica. It required more money than we earned in exports and nearly half of all the money the Government spent to service the debt.

So we borrowed some more to help pay the other bills until our creditors said they would lend no more or declined to lend at rates we could afford. While the Government gourmandised on debt, it outcompeted the private sector for the same capital to invest, create jobs, and generate growth.

It is against that backdrop, and in the face of the failure of the previous IMF programme during his predecessor's watch, that a year ago, Dr Phillips was under such intense pressure to complete a programme with the Fund. If we slip again, it will be far harder to recover.